Shop prices continued to fall over Christmas – but inflationary pressures are pushing up clothing prices
The British Retail Consortium (BRC) has called the start of a likely rise in inflation as it reported overall shop prices fell by 1.4 per cent in December, a deceleration from the 1.7 per cent fall in the previous two months.
The sharp fall in the value of the pound since the Brexit vote has not yet translated into an overall increase in shop prices, but inflation is expected to hit three per cent this year.
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However, there were monthly increases in prices on clothing and footwear, according to figures from the BRC and Nielsen. Month-on-month, prices on these items went up 1.1 per cent.
Prices for furniture and floorcovering went up 1.1 per cent in December and prices on electricals increased 0.3 per cent.
More price rises are expected when retailers' hedging strategies come to an end later in the year, although there is some dispute about how this will play out across the sector.
Some analysts have predicted that retailers will be forced to share the pain with shoppers. However, others have argued that the vicious price competition in retail will put the brakes on any price rises for consumers, meaning that businesses will have to accept reduced margins in 2017.
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Mike Watkins, head of retailer and business insight at Nielsen, said: "Consumer demand has been increasingly difficult to predict in recent weeks and retailers continued to hold back on price increases in December to ensure a strong end to the year.
"However, whilst the price war helped food prices to fall in the run-up to Christmas, we are now seeing the first impact of the currency depreciation of the last six months, with increases in retail prices for some non-foods such as clothing."
The tension between retailers and suppliers over the fall in the pound was demonstrated last year when it emerged that Unilever demanded Tesco pay more for its products such as Marmite and PG Tips.
Unilever temporarily cut supplies to Tesco – but the two parties struck a new supply deal before the UK's Marmite ran out at the country's biggest retailer.